Property Is Another Name for Monopoly Facilitating Efficient Bargaining with Partial Common Ownership of Spectrum, Corporations, and Land

Property Is Another Name for Monopoly Facilitating Efficient Bargaining with Partial Common Ownership of Spectrum, Corporations, and Land Eric A. Posner & E. Glen Weyl1 August 9, 2016 Abstract. The existing system of private property interferes with allocative efficiency by giving owners the power to hold out for excessive prices. We propose a remedy in the form of a tax on property, based on the value self-assessed by its owner at intervals, along with a requirement that the owner sell the property to any third party willing to pay a price equal to the self-assessed value. The tax rate would reflect a tradeoff between gains from allocative efficiency and losses to investment efficiency, and would increase in line with expected developments in information technology. The legal and economic implications of this system are explored. Introduction Property rights of all sorts—in real estate, in shares of corporations, and in radio spectrum, to take three diverse examples—give the owner a monopoly over a resource. It is conventional to think that this monopoly is benign. It gives the owner an incentive to invest in improving the property because she receives the entire payoff from its use or sale. This aligns social and private incentives for investment in property. This thinking plays a role in libertarian defenses of private property and in the influential work of legal economists deriving from the Coase Theorem.2 However, the monopoly also creates a serious cost that is often overlooked. Because the owner has a monopoly, she will attempt to sell the property at a “monopoly price,” that is, a price that exceeds the price that would be set in a hypothetical perfectly competitive market where many individuals with similar valuations of substantially identical property to the owner compete to make a sale. Just like a normal monopolist, a property owner sets a price that approximates what the seller thinks that the likely buyer’s valuation or reservation price for the property is. Because some buyers will have a valuation that is lower than the announced price but higher than the seller’s valuation, some efficient 1 Eric A. Posner is Kirkland & Ellis Distinguished Service Professor, University of Chicago Law School. E. Glen Weyl is Senior Researcher at Microsoft Research New York City and Visiting Senior Research Scholar at the Yale Department of Economics and Law School. Thanks to Will Baude, Lee Fennell, and Lior Strahilevitz for comments, and to Kathrine Gutierrez and Paul Mathis for research assistance. Posner thanks the Russell Baker Scholars Fund for financial assistance. 2 See, e.g., Richard A. Epstein, A Clear View of the Cathedral: The Dominance of Property Rules, 106 Yale L.J. 2091 (1997). sales will be blocked or delayed. This inhibits the allocation of property to its most valuable uses, a crucial component of a successful market economy. When this problem is discussed, authors usually refer to it as the “holdout problem,” most familiar in the context of development of real property and purchases of mineral rights and other natural resources, where projects can fail because sellers hold out for excessive prices. The problem also arises prominently in corporate takeovers, which frequently get bogged down in disputes over the acquisition price. The Federal Communications Commission has spent the last six years preparing an auction and property-redefinition procedure to deal with holdout problems that have inhibited the reallocation of spectrum to more efficient uses.3 In the area of intellectual property, scholars have long understood that monopoly power granted to inventors through patent law interferes with allocative efficiency—exemplified by the “patent troll” controversy.4 But the problem is much more general. In every transaction—home and car sales, sales of ordinary goods, and so on—private property creates bargaining problems that interfere with allocative efficiency. To put this problem starkly: allocative efficiency is impossible in a market economy based on private ownership. This problem was first clearly articulated by the “marginal revolutionaries,” William Stanley Jevons and Léon Walras, who laid the foundation for modern economic analysis. They, together with Henry George, another prominent early economist, believed that the only solution to the monopoly problem was nationalization (through taxation) of many forms of property.5 Building on their arguments, the socialist economist Abba Lerner advocated state ownership of property, together with a public “mechanism” that distributed possessory rights of property to users who valued them the most.6 In his Nobel prize-winning work, William Vickrey described how an auction could serve that function.7 Property is owned in common; the government would allocate temporary possessory and control interests in the property (effectively, leases) to the winners of an auction. Because users would eventually be required to return property to the government, they could not hold out for a monopoly price, or indeed sell their property at all. The modern literature on mechanism design, which was 3 Jeffrey A. Eisenach, Spectrum Reallocation and the National Broadband Plan, 64 Fed. Comm. L.J. 87, 88 (2011); Scott Duke Kominers & E. Glen Weyl, Holdout in the Assembly of Complements: A Problem for Market Design, 102 Am. Econ. Rev. 360, 362-63 (2012); Paul Milgrom & Ilya Segal, Deferred-Acceptance Auctions and Radio Spectrum Reallocation (Stanford Univ. Dep’t of Econ., Working Paper, 2015). 4 Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L. Rev. 1991 (2007). 5 William Stanley Jevons, The Theory of Political Economy (1871); Henry George, Progress and Poverty (1879); Léon Walras, Elements of Pure Economics: Or, The Theory of Social Wealth (1954). 6 Abba P. Lerner, The Economics of Control: Principles of Welfare Economics (1944). 7 William Vickrey, Counterspeculation, Auctions, and Competitive Sealed Tenders, 16 J. Fin. 8 (1961). 2 initiated by Vickrey’s contributions, has further refined our understanding of the monopoly problem with private property, and explored ways in which markets can be designed to mitigate it.8 However, this literature has ignored the traditional concern with common ownership.9 As we noted at the outset, the benefit of the monopoly granted by private property rights is that it gives the owner an incentive to invest in the property so as to enhance its value. If the owner can charge whatever price she wants when she sells the property, she will be compensated for an investment that increases its value, because she can increase the price to reflect the increase in value added by her investment. If she cannot—if she must instead return the property to “society” (meaning, to government officials)—then she has weak incentives to invest in it. Probably for this reason, Vickrey’s proposal has never been seriously considered by a government. Instead, the governments of countries where modern market economies exist have addressed the tension between allocative efficiency and investment efficiency by adopting something like a “mixed regime” that consists of strong private property rights for most ordinary types of property and significant deviations in special cases. These deviations include liability rules in tort law for relatively indirect forms of property-rights violation; adverse possession of unused property; time-limited property rights (generally used for intellectual property, but also for a range of government-leased resources like grazing land); redefinition of property rights in light of technological change (such as with the radio spectrum discussed above); public ownership in limited cases (for example, roads); and various jury-rigged forms of government intervention like eminent domain for private uses.10 In all of these cases, the deviation from private property reduces the holdout problem and thus enhances allocative efficiency, while paying the price in the form of reduced incentives for private investment. And yet there are serious problems with this mixed regime. First, it does not address the monopoly problem for a huge range of transactions—haggling over the purchase of a used car, months-long negotiations over house sales, corporate acquisitions that can drag on for years. In these cases, investment efficiency is maintained but allocative efficiency is sacrificed. Second, where the regime addresses allocative efficiency by deviating from private property, it relies heavily on 8 See, e.g., Roger B. Myerson & Mark A. Satterthwaite, Efficient Mechanisms for Bilateral Trading, 29 J. Econ. Theory 265 (1983). 9 By common ownership, we refer to property in which where more than one person has the right to proceeds from a sale. In the case of the Vickrey commons and our proposal, the proceeds from sales are effectively shared by everyone in society in the form of low prices. When lawyers use this term, they frequently have in mind an additional feature: the right of more than one person to occupy and control the property. Joint owners of a house both control the house and share the proceeds from the sale. For purposes of this paper, we use the term only in the first sense, and exclude the second. 10 See discussion in Section IV.C., infra. 3 bureaucratic or judicial valuations in order to ensure some level of compensation for the forced sale or transfer, or it denies compensation altogether. But the denial of compensation eliminates investment incentives, and imperfect government-supplied valuations and other forms of

Load more